China Loans Ease Ukraine Strain

Ukrainian president Viktor Yanukovych (R) and his Chinese counterpart Hu Jintao toast after clinching a strategic partnership agreement in Kiev, June 20, 2011.

Photo: RFA

China has promised major loans to Ukraine as the country faces rising pressure from Russia over imported gas costs.

On Dec. 10, Ukraine's government announced that its national gas company Naftogaz Ukrainy had received a U.S. $3.65-billion credit line from state-owned China Development Bank Corp. to help replace gas with coal.

The 15-year loans would be paid out starting in 2016, according to the Interfax news agency, suggesting they will provide little immediate relief from Ukraine's current financial squeeze.

But the support for replacing gas with cheaper domestic coal comes at a time when Ukraine has been struggling with Russia over the high cost of its gas supplies.

Ukraine has been paying some of the highest gas prices in Europe under a long-term contract signed with Russian monopoly Gazprom in 2009.

The contract, which pegs gas to higher-priced oil, has saddled Ukraine with import costs of over U.S. $12 billion a year.

President Viktor Yanukovich has tried for nearly three years to renegotiate the terms, but so far without success.

Talks with Russian President Vladimir Putin set for Dec. 18 were postponed as the impasse persists.

Control

Russia has held out for concessions including control of Ukraine's transit pipelines, which have carried most of Gazprom's exports to Europe since Soviet times.

The standoff has kept Europe on edge for years following a series of disputes that have disrupted winter gas deliveries.

The costs have become critical for Ukraine, which has been warned by the International Monetary Fund that its hard currency reserves are only enough to cover 2.6 months of total imports, according to a separate Interfax report.

The IMF has withheld further loans until the government raises household gas rates, an unpopular step that Yanukovich has been reluctant to take.

To lower its costs, Ukraine has cut gas imports from Russia with measures that include using more coal. But the effort has led to another financial risk.

Under terms of its contract, Ukraine must buy a minimum volume of gas or pay a penalty. By one estimate, Naftogaz could face U.S. $2.7 billion in fines for buying less than the minimum this year.

Stepping into conflict

China seems to be stepping into the conflict with loans that could help Ukraine reduce its reliance on Russian gas even more.

Edward Chow, senior fellow for energy and national security at the Center for Strategic and International Studies in Washington, said China must know that the loans may be seen as interference, but officials have said nothing about the motivation.

"I think it's a little more than curious," said Chow, although China's reasons remain unclear.

China's calculations could be strictly financial, despite the risk of annoying Russia, which has also been trying to strike a deal for gas exports to China since 2006.

"You have Chinese capital chasing deals all over the world, and Ukraine is a geopolitically important place, so why wouldn't the Chinese ... want to have some kind of a foothold?" Chow said.

Chow suggests that Ukraine may have actually weakened its hand with the Russians by appealing to China.

"Instead of giving them the idea that they can't be too hard on the Ukrainians because they will just rush to the Chinese, it may have the opposite effect of just proving how desperate the Ukrainians are," he said.

Questions

Beijing's practice of offering big loans in Russia's traditional backyard may continue to raise questions about its relations with Moscow, however.

In September 2011, China agreed to grant Belarus a soft loan of U.S. $1 billion under similar circumstances as the country was trying to resist a Russian takeover of its Beltransgaz pipeline system.

In that case, Belarus was also faced with rising prices for Russian gas and an IMF refusal to extend further loans.

The Russian press saw the move as competition for Belarusian assets that would have to be sold under pressure to pay for gas supplies.

"It seems Russia will now have a powerful rival in the fight for control over state-owned Belarusian firms," the daily Kommersant said at the time. Russia's Gazprom succeeded in gaining control over Beltransgaz later that year.

Last week, the Belarusian government said China's Export-Import Bank would lend it over U.S. $600 million for satellite communications and highway projects, Russia's RIA Novosti news agency reported.

President Alexander Lukashenko said Chinese credits would be "more than $1 billion," according to Interfax.

Financial forays

So far, Russian officials have kept quiet about China's financial forays into the former Soviet republics, although its influence has grown immeasurably in Central Asia with oil and gas investments over the past decade.

It is unclear whether China is now looking for similar influence in Ukraine.

In September, the Financial Times reported that Ukraine planned to start shipping 3 million metric tons of corn per year to China under a U.S. $3-billion credit agreement with the country's Export-Import Bank. First deliveries were expected by the end of the year, the official Xinhua news agency said.

Ukraine has high hopes for its agreement with China on coal conversions, which are planned for several regional heat generating plants.